Do a lot
with little
The leverage effect of stock options offers you an above-average return with a relatively small capital investment. The following simplified example illustrates how this leverage works.
Shares
You invest 1000 US dollars (USD) in 10 traditional company shares of 100 USD each. The company’s share price rises by 15% to 115 USD. You now hold shares worth 1150 USD. When you sell the shares, you make a profit of 15% or 150 USD on a stake of 1000 USD.
Stock options
Instead of investing in shares, you invest only 100 USD in 10 stock options (of the share from the example) at 10 USD each. The rising share price of 15% and 15 USD per share causes the stock option to increase in price by 15 USD as well. This is now traded for 25 USD. You now hold stock options worth 250 USD. When you sell the stock options, you have realised a profit of 150 USD and 150% with a stake of only 100 USD.
In a call option, a negative price movement of the share also has a negative effect on the stock option and can even make it worthless. However, while with a share portfolio you will always suffer losses when share prices fall, with stock options you also have the opportunity to profit from such a situation by betting on falling prices with put options.
Participate gradually in the base value
Stock options: Above-average returns and high risk. That is how investments in stock options can be summarised. A stock option gives you, the buyer, the right (but not the obligation) to purchase a predefined number of shares at a predetermined price and sell them (call option) or buy them (put option) within a predetermined period. The following simple example illustrates how stock options work: a stock option (call) costs 10 US dollars (USD) and gives the holder the right to buy the associated underlying security (share) on 16 December 2020 for 500 USD.
An important advantage of stock options is the leverage effect. This gives you the possibility, with a relatively small initial outlay, of obtaining an above-average rate of return. In our example the share is traded on the exercise date for 550 USD. However, with the stock option, you receive the underlying security for 500 USD, hence generating a profit of 40 USD or + 400% of your invested capital.
The expected high returns must be balanced against the corresponding risk of losses, which must be weighed up carefully. In our example, if the share price on the exercise date is 495 USD, the option is worthless, i.e. you will have lost 10 USD. If you are looking for above-average returns and are willing to run the risk of greater losses, you need look no further than Skyline Trading AG.
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